✦ LIBER ✦

Bankruptcy risk, firm-specific managerial human capital, and diversification

✍ Scribed by David C. Rose

Publisher: Springer US
Year: 1992
Tongue: English
Weight: 585 KB
Volume: 7
Category: Article
ISSN: 0889-938X
DOI: 10.1007/bf00354847

No coin nor oath required. For personal study only.

✦ Synopsis

This paper proposes a model in which firm diversification acts as an efficient form of nonpecuniary compensation for the manager. In the model diversification rewards the manager by reducing the likelihood of bankruptcy which in turn increases the expected value of his firm-specific human capital. Unlike the principal-agent model of diversification, this model shows that diversification may be optimal even if the manager is risk neutral and his behavior can be observed by firm owners.

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